When I returned to the condo, my wife asked me what I thought. Well, I said, they painted the house shit brown, and they're asking for too much money, but except for that it's a possibility. So we arranged with the broker to inspect it.
The Contrarian's View s published 11 times per year on a mostly-irregular schedule, and the views expressed are those of the author and editor, Nick Chase. Because nobody can predict the future, results of past suggestions or recommendations are no guarantee of future results. My own material in this publication may be freely quoted provided proper attribution is given to its source; quotes from other people are subject to fair-use copyright restrictions. Subscription rate: Selections are free on the Internet. Using your favorite Web-browsing program, open URL http://onashi.org. Mailed paper subscriptions are currently not being accepted (current paid subscribers will continue to receive their paper issues). Unsolicited material sent to us by UPS or by courier other than the postal service is refused and returned to sender! ISSN 1536-4429 Phone: (508) 757-2881
For the remaining 45 stocks I did a preliminary screen. In early January the market was about 7% higher than in early November when the money manager had bought most of them. If the stocks were laggards.... hadn't kept pace with the general market.... and there wasn't a good reason for them to be lagging.... then they got sold. A few companies had shrinking sales; they also got sold. I also dumped the banks and insurance companies which have giant positions in the derivatives markets; no financial accidents for me, thanks.
I decided to let the rest of the stocks in the portfolio "talk" to me, by placing 6% to 11% trailing stops (depending on their volatility) under their current market prices. If a stock were truly in a strong uptrend, it would keep ahead of my stops; if not, it would be stopped out and sold. Mind you, there was nothing "wrong" with the great majority of these stocks. The money manager actually had done a pretty good job, and most of the companies he/she chose were financially strong with growing sales and revenues. It's just that aggressive growth stocks with minuscule dividends are not an appropriate choice for an income portfolio, and I had no intention of hanging on to the great majority of them. But I had no problem with riding them upward until they ran out of gas. (My only deadline was trying to beat annual-report season, so I wouldn't be deluged with paper.)
I did another weeding of laggards in mid-March. Now, as you can see under "Portfolio Review", only ten of the inherited stocks remain in the portfolio.... with trailing stops still in place for most.
In late January I went hunting for high-yielding stocks, and the value screens led me to rural telecom companies which (in January) were grossly out-of favor with the herd. Many of these sported dividends in excess of 8%. The Street had so written off the future prospects of these companies that the only way they could attract and keep shareholders was to pay dividends out of free cash flow, much as companies did during the Great Depression. But although telecom competition is fierce, the reality is that rural telecoms don't face much competition from wireless or cable because, well, they're rural, and it costs too much to build cell towers and string cable in rural locations. And the rural telecoms do have a growth market in DSL Internet connections.
Also, technology does change, and it's possible that someday all of those wood telephone poles and that copper wire will be a valuable conduit for high-speed communication (much faster than DSL). So I bought three of these depressed puppies.... Citizens Communications, Iowa Telecom and Valor Communications, and there were another half-dozen promising candidates that I didn't buy. Citizens is a company I have followed for a quarter-century (and previously owned). Originally a well-balanced multi-utility company (electric, phone, water, gas), it was turned by the dreadful, overcompensated Leonard Tow and his wife Claire into a hot-trend-following high-tech telecom outfit and was nearly destroyed in the process, as Tow caught nearly every tech trend after it had peaked and was collapsing. Last summer Citizens dumped Tow, and I am always interested in companies with a change of management.... things usually (but not always) improve.
I even convinced the PIGs to take a flyer on Citizens Communications. One of the PIGs asked me, what will happen to the stock price if they cut the dividend? Well, I said, the price will probably go up, because the company will then in effect be saying it has found a way to make itself grow, and the Street loves growth. In the meantime, you make 8% while you wait.
The rural telecoms no longer appear in my value
screens (because their stock prices have recovered),
and not much else does except for a few REITs.
Sorry, no REITs for me while the real-estate bubble
is popping. I'll look at them again in a year or two
after they've become deleveraged and underivativized. I am looking for good buys in energy and
metals and might buy Chesapeake Energy convertible preferred D and Newmont Mining at what I
think are fair prices.
Of course I'm well aware that central Florida, like most of the populated U.S., is coming off a monstrous housing bubble, but for us the controlling factor was not the absolute (bubble-inflated) cost of any house we might buy, but the differential between the cost of the house we might buy and the proceeds from the sale of our condo; a figure which hopefully would be covered by the land proceeds.
When we arrived in Florida we got in touch with our real-estate broker there, who is also a personal friend. Imagine my surprise when she told us our condo would sell for about 40% more than it would have in February 2005. Unfortunately, house prices were also 40% higher.... or more.... than a year ago. This wa quite a shock for me, as I have been following central Florida real-estate prices for a number of years, and they have historically been cheap relative to the Northeast, and I am not accustomed to seeing prices higher than they are in Worcester, the financial backwater of America.
Our broker friend advised us that it was a "buyer's market", with the inventory of unsold homes in January triple what it was in November. (Indeed, the Orlando market appears to have peaked in November 2005.) But after satisfying my wife's requirements.... a particular city, no homeowners association, 1-car (or more) garage, no gas, public water and sewer... the choices in our price range dwindled to only a few homes.
After we looked at a half-dozen homes that didn't
quite fit, my wife took a break while I went to check
out one in our own neighborhood that was too much
money. It was a flippee, one that had been bought
last August on speculation, fixed up and somewhat
modernized, then put back on the market in hopes of
capturing a quick profit. It was listed at $239K, then
the price was dropped to $219K two days before I
drove by to check it out. Not bad, I thought, except
for the price and the fact the exterior had been freshly
painted shit brown with black trim. (I had just come
from pooper-scoopering after our dogs at the condo;
same color.)
When I returned to the condo, my wife asked me
what I thought. Well, I said, they painted the house
shit brown, and they're asking for too much money,
but except for that it's a possibility. So we arranged
with the broker to inspect it.
When we drove up my wife said, That color is not "shit brown". It's "dark gold", and it's pretty. OK, whatever.
The interior was painted light shit brown.... er, sorry, café-au-lait.... but it was bright, fresh and cheery - the flippers had done a good job. The main problem was that the sellers' agent had the wrong dimensions for the bedrooms, which were only about two-thirds the sizes given in the listing. Being a rehab of a 1960s-vintage house, it was also very short on storage space, electrical wiring and outlets and such, and the so-called "Corian" kitchen countertops were really Formica. So it was easy to see why the house hadn't sold. It was marginally worth just under $200K in a badly-inflated housing market, both the broker and I agreed.
But what might be too small a home for full-time use was actually just about right for us part-timers. I really like this house, my wife said. Make an offer, the broker said.... you never know.
So we pursued it further, even to the point of my sketching out the dimensions of the rooms to see if our condo furniture would fit.
One of our requirements for buying a Florida house wa that our monthly carrying costs could not greatly exceed what we currently pay for the condo. About half our condo fees are for communal water which we don't use (the units are not separately metered). We expected the money going to condo fees would instead go to insurance and lawn maintenance. (For home improvements and building maintenance we would expect to dip into savings.) We expected to pay a bit more in real-estate taxes; maybe double.
OK, Nick, you say, get to the point. Did we make an offer on the house?, you want to know. No, we didn't, and what killed the deal for us were the taxes.... a conglomeration of really bad tax policies.
You have to hand it to Florida, they really know how to rip off the non-residents. Florida residents get a $25,000 homestead exemption (about a $500 tax saving), plus the property valuations on their primary residences cannot be raised more than 3% a year (based on a home's purchase price). Nonresidents and investors get neither the homestead nor assessment break so, as a result, they (along with new home buyers) bear a disproportionate part of the real-estate tax burden. For us, the taxes on that overpriced shit-brown home would have been quadruple what we currently pay on the condo, not double as I expected.
The second tax-killer came courtesy of Congress. I surmised that we could swap the condo (plus some cash) for a house in a 1031 exchange, but it turns out that only investment property is eligible for a tax-deferred 1031 exchange. A plain second home is not eligible for exchange, nor is there any tax deferral when you sell. If you sell a second home at a profit, you must pay capital-gains taxes (both Federal and Massachusetts for us) on the gain which, with bubble-inflated prices, would be considerable. You gotta love Congress.... mortgage interest on a primary and secondary residence is tax-deductible, and the sale of a primary residence is tax-free (up to a point) or tax-deferred, but the sale of a secondary residence is not. What, exactly, was the logic behind this?
The tax burden - both capital gains and the ongoing annual real-estate tax - flipped the house purchase (assuming the offer my wife and I had in mind would have been accepted) from doable to not-doable. It obviously would pay to wait.... until the value of our condo dropped much closer to its purchase price, thereby eliminating the capital-gains tax, and home sale and resale prices returned to reality, thereby shifting more of the real-estate tax burden from new house buyers to existing homeowners. If condo and home prices should decline in proportion, then the "gap" between the condo sale price and the home purchase price would also decline in proportion. For example, a 40% decline in real estate prices in the coming bust would also shrink the amount of cash my wife and I would have to cough up by 40%, and that would definitely make a house more affordable.
Unfortunately, there is no guarantee that all real
estate values will decline equally. Usually, in a real
estate bust the condos take the price hit first, as they
are the last to soar in price as people are priced out of
the single-family home market. But that condo/house
price gap should shrink somewhat, so my wife and I
feel we can well afford to wait.
What would I pick as Greenspan's most unforgivable legacy as Fed chairman? I would say that under his tenure an illusion was created that there is no real risk. Investors, analysts, the media, and even the average Joe on the street have wrongly learned that there is no longer such a thing as risk. If something goes wrong the Fed will always have the printing presses at the ready. This philosophy has caused tremendous excesses by consumers and businesses alike. - Marc Sexton
Now along comes Ben Bernanke, a guy many feel, for whatever it's worth, is more of an inflation hawk than Sir Alan. In some ways that's a bit like saying he's the smartest kid in the dumbest row at school. And one wonders how long it will be before that becomes a sticker on the rear bumper of some proud parent: "My son is the smartest kid in the dumbest row at St. Stupid's." - Ron Ellison
Call it a gut feeling that is hard to explain fully but something just doesn't seem right when all asset classes are exploding higher. Sure, the bubble in 90s was bad, but commodities along with gold were also in the tank. Housing was doing fine but was nowhere near the boom that was to follow. Now we are supposed to believe that there will be a boom in stocks, housing, hell just about everything. In my view, this is the ultimate Greenspan legacy. He gets to get out before the manure hits the fan but hopefully history will remember who set all the deal up. - Marc Sexton
The whole thing is incredible. I mean the 'savings glut,' and nonsense like that. It's the kind of thing you'd expect from a Third World country, but not from America. You know what amazes me most is that Americans have come to believe that consequences no longer exist. They think they can do whatever they want for as long as they want...and nothing will ever go wrong.... They think the bubble economy will never end, but bubbles always end. This one will end, too. And there will be consequences, and not very pleasant ones. This is not something the Fed can manage. And nowhere in America do you hear any serious discussion of the real problems involved. When I first started talking to American economists, it was back in the 1960s. We had problems back then. We thought we had problems, at least. But when I look back I realize that we had no problems that come anywhere close to the problems we face today. These problems, on an international scale, never existed before - at least not in this size. And no one talks about them. - Kurt Richebächer
So far, so good, for an unbalanced world -- the sky has yet to fall. And the longer a lopsided global economy continues to chug along with impunity, the more the broad consensus of opinion becomes convinced that this is a sustainable outcome. This increasingly complacent mindset may be about to meet its toughest challenge: A likely turn in the liquidity cycle appears to be on a collision course with ever-widening global imbalances. This could well be a lethal combination that triggers the long-awaited capitulation of the American consumer -- heretofore the mainstay of a US-centric world. - Stephen Roach
Our financial condition is a ticking time bomb. What none of us knows is when it implodes. - Bill Fleckenstein
I am convinced that the US Fed's monetary policies will lead to exponentially widening wealth inequity and impoverish the majority of US households, which will then lead to social strife, protectionism, war, and the breakdown of the capitalistic system. - Marc Faber
In my view, the mountain of debt this country has accumulated on every level -- particularly over the last five years -- means there's a limit to what the Fed can do to squeeze out inflation. I don't know what level of interest rates that means. But I do know that millions of Americans are getting squeezed as we speak by rising interest rates on home equity loans and adjustable-rate mortgages. The point at which consumers will stop spending and pull in their horns is an unknown as far as I'm concerned. In fact, to date most people seem to be responding by just borrowing more on the credit cards. But sooner or later, there will be a price to pay, either in the consumer market or with a financial accident. The collapse of Long Term Capital in 1998, which crushed stock markets globally and nearly took down the US as well, is an example of the latter. - Roger Conrad
If the US does not take policy steps to reduce its need for external financing, before it exhausts the world's central banks willingness to keep adding to their dollar reserves then the large, growing and unsustainable fiscal deficit and U.S. current account deficit will become twin financial train wrecks for the U.S. economy and will lead to a sharp hard landing of the dollar, a sharp increase in long term interest rates, a significant increase in the inflation rate and a sharp slowdown of the U.S. and global economy. A dollar crash/hard landing would be associated with a bond market rout and would have serious consequences on all other risky and overvalued assets (equities, housing, high-yield debt, emerging market debt). The effects in the US of higher short and long rates on the housing market, both flows of new housing and new home demand on the value of existing housing, would likely be severe. Oil prices will skyrocket above $100 per barrel. Then we will get a U.S. and global recession that will pale compared to the one in 1980-82. I am not being alarmist or unrealistic when you consider our reckless fiscal and public debt policies, the absence of adult policy supervision in Washington and the mediocre or nonexistent US economic leadership. - Nouriel Roubini [Professor of Economics and International Business, Stern School of Business]
Well, it would seem from all reports of late that the Fed has, indeed, gone beyond the tipping point with its latest interest rate increase and, as such, has set up America for a financial meltdown.... Be that as it may, the vast majority of Americans, as indicated in a recent Bloomberg Los Angeles Times poll, remain confident that housing values will continue to flourish and that the high-flying market will come in for a smooth, soft landing instead of a crash. In fact, on average, only 15% of those Americans surveyed expect home prices in their neighbourhood to fall during the next 6 months while 26% see prices rising during that time while those investors making more than $100,000 a year were even more optimistic at 12% and 43% respectively. Indeed, almost 7 out of 10 expect the value of their homes to appreciate by 5% to 30% during the next three years and more than a third singled out real estate as the place they would put additional money if they had it to invest. Unfortunately, the facts.... do not support their optimistic outlook which is doing nothing more than setting them up for a harsh dose of reality and financial loss as events unfold. - Dudley Baker
Global imbalances, such as the record U.S. current account deficit and the ballooning surpluses in some Asian countries, are persisting and if not resolved in an orderly way, we face the threat of great disruption with periods of outright recession. - David Dodge [Governor, Bank of Canada]
In the United States, my own work shows that between 1945 and 1971, when the dollar was fixed to gold at $35 per oz under the 1944 Bretton Woods arrangement, the real economy in the US grew by 4 percent per year. From 1971 when the dollar was floated to 2004, real growth of the US economy was only a pitiful 0.3 percent per year. - Jude Wanniski
The dollar as we know it is being killed, poisoned by debt from the hand of the federal government with its accomplices in the Federal Reserve and the banking system. So far it's been a slow death, with few people watching, but that's about to change. With the horrific new amounts of debt being injected into the dollar's weary remains, its death is not far off. - James Turk
Real unemployment right now -- figured the way that the average person thinks of unemployment, meaning figured the way it was estimated back during the Great Depression -- is running about 12%. Real CPI right now is running at about 8%. And the real GDP probably is in contraction. - John Williams
When that [2000 stock market] bubble burst, without a foundation of strong income growth, or a financially sound consumer, it triggered a recession that was a lot longer and deeper than the government would have you believe. In fact, I contend that what we are in now is a protracted structural change that goes back to the beginning of that 2000 recession, which eventually may be recognized as a double-dip downturn. We did have some recovery in 2003, but in 2005, you started to see signs of a downturn in a variety of leading indicators that I use. - John Williams
A survey by the Federal Reserve Board's Survey of Consumer Finances offers us the most detailed recent look at the balance sheet of U.S. households. The median family has about $3,800 in the bank, does not have a retirement account, has a home worth $160,000 with a mortgage of $95,000. No mutual funds, stocks or bonds populate their investment portfolios. They make (jointly) $43,000 and struggle to pay off their $2,200 in credit card debt.... That means 50% of Americans are in worse shape.... It is not a pretty picture. - John Mauldin
The U.S. outlook is all about the property market, which has been the wind beneath consumers' wings this decade. The property market is rolling over, but at this stage we're only seeing a slowing in the market because property is a momentum-driven market with support from mortgage lenders making exotic loans and selling them to strangers in foreign lands. Therefore.... property market euphoria will not go quickly and quietly into the good night, but rather on the installment plan, with much screaming of denial. - Paul McCulley
Many homes were sold with Adjustable Rate Mortgages in 2003 and 2004. Now, we are seeing more than $2 trillion (with a T!) of these mortgages coming up for a reset in their mortgage rates. My back of the napkin calculations suggest interest payments are going to eat up at least another $3 billion a month in consumer spending capacity over the next year. In a $12 trillion economy, this is not all that large, but it will suck almost 1/2 of 1% of consumer spending potential out of the economy. - John Mauldin
There's a wonderful myth afoot that Baby Boomers will be able to take their accumulated stock market profits and savings out of the markets in an orderly fashion. Such a capitalistic wet dream might be possible if the world wasn't running out of resources and if new investors were available to step in an replace the investments being withdrawn. But that doesn't appear to be the case. - George Ure
Each year Social Security taxes exceed the benefits paid out to recipients. The money was supposed to be invested so that future liabilities for retirees would be protected. Instead, each year these surplus funds are transferred over into the government's general fund and spent. In place of real investments, the government issues I.O.U.s in the form of zero-coupon bonds. These bonds will have to be redeemed and refinanced when they come due, putting further pressure on the financial system. There simply won't be enough money to fulfill the promises made to future retirees... Be prepared. A painful adjustment is coming. Means testing, a later retirement date, and higher payroll taxes will shortly be upon us. There is no trust fund. The money has been stolen. Eventually, as the surpluses run out over the next 5-10 years, that painful adjustment will be upon us. Forget the year 2040 and any other future date given as when these surpluses run out. Those dates are pure fiction. We will hit the wall long before then. - Jim Puplava
Once the old school begins retiring and are replaced by technologically-savvy executives who understand the irrelevance of location to intellectual labor, one should expect to see radical changes in the world of white collar employment rivaling those that rocked the blue-collar world in the recent past. Of increasingly questionable quality, it is probable that a college degree has never been of lower value. Parents and prospective students alike should seriously investigate the matter before blithely assuming debt in order to follow the educated lemmings on a path that appears to be ever more outmoded. - Vox Day
If a slate of neo-Nazi skinheads swept to power in a European election, would you say that the voters were seeking 'honest government' and 'services'? Palestinians are not stupid, and it insults their intelligence to pretend that when they vote to empower a genocidal organization with a platform straight out of 'Mein Kampf,' what they're really after is better health care.... It's a safe bet that hatred and mass murder had something to do with the turnout. - Jeff Jacoby
UFOs are as real as the airplanes that fly over your head.... The time has come for the veil of secrecy to be
lifted and let the truth emerge... - Paul Hellyer [Canadian Minister of Defense, 1963-1967, on September 25,
2005]
The first is the persistent rise in short-term interest rates by the Federal Reserve, because they actually believe the bogus statistics that come out of D.C. and don't realize that the country is actually in a shallow recession with inflation steaming ahead at about twice the "official" rate, with people taking lower paying jobs, and with consumers actually getting poorer by taking on debt loads they can't service. Other key interest rates, such as credit-card debt and adjustable-rate mortgages, rise when the Fed raises the rates it controls.
The second is the Japanese central bank's intent to raise its real interest rates above zero. They haven't actually done so yet, but they will... and this will diminish the "bond-carry trade" and put pressure on the dollar's value in other currencies.
The third is that the housing bubble has clearly popped in almost all of the nation. The housing ATM is no more! As mortgage payments are reset and monthly payments rise, while the value of one's home declines, the casualty will be consumer spending, and the next recession.... as measured by the bogus statistics.... will be upon us. Since (in my opinion) the behavior of stocks is actually coincident with the health of the economy, as we tip into "official" recession stocks will correct.
Opposing this is the occasional foray by the "Plunge Protection Team" into the markets to keep stocks pumped up. These efforts are probably enough to keep stocks from crashing 1987-style (barring a systemic failure), but not enough to reverse the general downward trend I expect.
In January I thought (50-50 odds) we might have a double top, one in January 2006 and one in March. That's more or less what has happened and, barring a systemic failure, I think a third top, lower than the late March highs, is likely in early to mid-May.
After that, be prepared for a mixed summer and an ugly fall.
In my opinion, the risk of systemic failure is
currently about 35%.
A. "Inheritance" - real (normalized) "dividend distribution" portfolio, under construction:
SUMMARY - "Inheritance":
Original cost: $100,000.00 (normalized)
Present value: $108,393.57 (see below)
Increase: $8,393.57 [+ 8.39%]
COMMENT on "Inheritance": The total at the end of the "Cost Was" column, $100,000 (normalized), shows the (normalized) cost basis of the 29 stocks "accepted" into or that I bought for the portfolio, plus cash, to make up the initial $100K. But remember, this is a dividend-income portfolio, in which the dividends and interest are drawn off to support retirement (and pay taxes), and only the capital gains are added, or capital losses subtracted from the portfolio cost. After adjusting for the 14 closed-out positions, the portfolio cost (normalized) is $105,452.05 with $67,447.75 currently in cash or near-cash.
B. "Professors' Investment Group (PIG)" - investment club portfolio.
SUMMARY - "PIG":
Original cost: $10,699.00
Present value: $20,892.09
Increase: $10,193.09 [+95.27%]
COMMENT on "PIG": I continue to "roll over" 3-monthT-bills, one per month. BP, on which I had put an automatic 9% trailing stop, was stopped out (automatically sold). The PIGs made a nice profit on that one. As I mentioned above, the PIGs have added 100 shares of Citizens Communications to the portfolio, as a turnaround play.
TIAA/CREF 403(b) retirement plan; I switch between indexed stock/bond/money funds:
(No transactions since June 30, 2004 due to my retired status. Update soon, I hope!)
A portion of my TIAA-CREF funds are currently in the process of being transferred to Fidelity Investments.
Values, 27Mar2006: stock, 219.17; equity-index, 87.06; MM, 22.88; bond, 76.37; inflation-indexed bond, 45.76; real estate, 246.63; TIAA current yield
in SRA, about 4.92%. Current money-market yield is 4.29%.
Gain, 1988: 18.91%; 1989: 14.48%; 1990: 8.28%; 1991: 27.93%; 1992: 10.20%; 1993:
3.08%; 1994: 4.07%; 1995: 4.80%; 1996: 5.28%; 1997: 5.38%; 1998: 5.72%; 1999: 5.12%;
2000: 9.99%; 2001: 1.11%
Gain, January 1 through March 31, 2002: 0.97% (3.86% annual rate of return)
Total gain since January 1, 1988 (14.25 years): 223.43%
Compound annual rate of return: 8.59%
Gain shown excludes the impact of additional monthly cash contributions.
(Please note that I have not had the time to calculate my rate of return beyond March 2002, and
may not get the time until 2006)
Buying CREF stock on January 1, 1988 and holding it gained 422.38%, for a compound annual rate of
return of 11.46%.
COMMENT on NYSE "Timer's Trend": We are currently on a BUY signal of November 18, 2005.
COMMENT on NASDAQ "Timer's Trend": We're on a BUY signal given March 22, 2006. (Much whipsawing for the past two months! The NASDAQ is weaker than the NYSE.)
NEXT ISSUE - will appear near the end of April 2006.